ARM Resets And The ‘Ouch’ Factor
Readers want to talk about adjustable rate mortgages. “ARM is pretty scary stuff. One may say ‘oh the interest rate only went up by a few percent!!’ (1) Say, you purchased an over-priced but normal $750K house in California with 2.00% APR interest only ARM… (just to be cool, of course, no downpayment). Your monthly payment is only $1,250. not bad… not bad.”
“(2) Come ARM reset, say additional 2.00%, bringing the total rate to 4.00% or 2x the original. (3) Now your payment’s $2,500 (4) Soon, it will be 6.00%; that’s $4,500… INTEREST ONLY…oops. Ps: don’t forget to add $700/month for tax, a few hundred more for blah, blah, blah..ouch!”
Another put a finer point on it. “Here are the actual numbers for your example. $750,000, 2.0% year one $1250 (actual accrued rate 7.7% current), year two payment $1343 (7.5% increase in the payment, balance up to $792,000), year three payment $1443 (balance up to $837,000), year four payment at 7.7% for 27 years- ———$6,147 ouch.”
Another replied, “I was a Math major in college so when I shopped for a mortgage it was easy to see through the ‘adjustable’ problem (especially because if you have a fixed mortgage you could always re-fi if rates dropped. And if you’re not stupid you’d refi for the remaining balance and not try to pull cash out.)”
“Adjustables only make sense if you actually have the cash in the bank to pay off the loan if you need to! Then you can take advantage of a low teaser rate for a few years. The mortgage industry simply takes advantage of the fact that people don’t do the math and realize that their $1250 payment can become $6147 in a couple of years….”
One had this to say, “Don’t mistake a plain vanilla adjustable rate mortgate with the exotic ones, such as the option-ARM, interest only, and teaser rate loans. A regular ARM makes a lot of sense when interest rates are high.”
And lastly, “Should figure NegaAm for five yrs with a recast of the loan if and when it gets to 110% to 125% (depends on bank) of the original loan. The bank can authorize an appraisal at any time.”
“The cap on the loan could be as low as 9.95% or as high as 12.95%, in a rising interest rate, declining house value - expect to see more recasts as a result of value. Eg, I buy in housing development for 500K cash, friend buys similar unit same development 95% NegAm 5% down. I hate the 1 hr drive and decide to sell at any price. First offer is 425,000 I accept! All negam borrowers in the same development are subject to the new appraisal. Sayonarra.”
The US News and World Report. “Call it the worst worst-case scenario. The interest rate on your adjustable-rate mortgage jumps just as the housing market enters a prolonged slump.”
“Then something really bad happens: You lose your job. There’s a medical emergency. You get divorced. You fall behind on your mortgage payments, and the bank forecloses on your home. Those scenarios are now playing out for growing numbers of homeowners.”
“In the past, foreclosures have largely been the result of a bad economy. Yet this time around, with a record number of borrowers exposed to rising mortgage payments through adjustable-rate and subprime mortgages, the increase in foreclosures could be a bad omen.”
“Adjustable-rate mortgages worth over $1 trillion are due to reset in the next two years. ‘We’ve never had such a high percentage of loans come due at the same time, so no one really knows what will happen,’ says RealtyTrac’s Rick Sharga.”
Can you say repeat of the late 70s early 80s? Up in Canada the fact that people couldn’t get 30 year fixed mortgages lead to massive foreclosures. Our friends all lost their homes (we couldn’t afford to buy at our age then) because their mortgage rates went over 18% when they adjusted. It is criminal that ARMs are even legal. It is one thing to have inflation adjusted mortgages if everything is indexed so your income automatically goes up with your mortgage but to raise the interest rate, criminal. A person with an ARM should be qualified at the Max interest rate and if they can’t afford that they need to get a fixed loan for a lesser amount.
We did great with two ARMS. Bought in ‘87, sold/bought in ‘94, sold in late ‘04 (now rent at 50% of buying). We always kept interest rates lower than fixed. And we always kept an eye on interest rates and were prepared to switch to a fixed if it made sense.
ARMS are dangerous if you don’t pay attention, or can’t afford to pay for the loan at fixed rates.
Right now, ARMS are dangerous, very dangerous.
I must admit, I did an ARM on my first home purchase in the early 90’s. Once rates dropped in 1998 I refiananced into a 6.75% fixed. I believe when rates are high ARMS are a reasonable risk, however, when they are at historic lows, IMO, only a fool would not fix. We had fixed rates at 50 years lows in 2003-2005 and some 70% of Ca was on some sort of an ARM. Foolish!
“We had fixed rates at 50 years lows in 2003-2005 and some 70% of Ca was on some sort of an ARM. Foolish!”
I’m counting on a lot of people having done so because it was the only way they could squeeze into the house. Such folks have no wiggle room at all and will fall like dominos as the rates re-set.
That was when Greenspun was telling people ARMs were a good choice! Suuure…he has the public’s interest at heart…..
We were considering fixing in ‘02 and ‘03. But we knew we were moving, and decided to wait it out. When we started looking at homes & finaicing, we looked only at fixed loans. However, we couldn’t find a home that made sense.
The amazing thing was the types of loans and homes were being pushed into. The RE and mortgage industry is very complicit in creating the FB.
Do they have plausible deniability? Will this bust be the end of the 6% comission, as RE agents rank below used car salesmen?
The anecdotes coming out of this bust into the MSM will do great damage to RE industry. Agents will be whipping boys.
Yeah, right now getting an ARM is foolish. I was talking with this lender I work with what the price difference would be for a 5 yr fixed adjustable loan and a 30 yr fixed traditional loan…$300 a month…that’s it
“It is criminal that ARMs are even legal.”
I disagree. There are some individuals for whom ARMs are the most advantageous form of mortgage financing. Why should the government make it illegal for this group to benefit from their optimal financial contract, just because many fools use them inappropriately?
I agree, a lot of people know how to utilize arms to their advantage. In today’s world, it is sad to say that most do not. I don’t want my government to add any more regulation than there already is. Like smoking, if you smoke 1/2 a pack a month, most likely you will not get cancer. But if you smoke 3 packs a day, most likely you will get cancer. Each person is responsible for their own life, all they have to do is “read” the writting on that loan or the warning on the cigarette pack!
Because it hurts the country and the rest of our people.
How does it hurt the country? These people are now homeowners, a key part of the American Dream, and building equity with each passing day.
> These people are now homeowners, a key part of the American Dream, and building equity with each passing day.
They are building equity only, if they pay principal and don’t take it out again with a HELOC. And the rest (American Dream) is more ideology than reality: if a person work in Manhattan, earns big bucks but rather rents than invests in real estate, is this person therefore not living the American dream? I don’t think so.
“Why should the government make it illegal for this group to benefit from their optimal financial contract, just because many fools use them inappropriately?”
It’s the middle class that needs to be protected, so the more financially savvy taxpayers among us aren’t forced to bail out the fools.
I suppose many of the smarter taxpayers that would make an ARM work for them have their tax avoidance opportunities. So….once again the bailout will fall squarely on the hapless middle class.
I’m just wondering what proportion of our society the powers that be feel can be thrown into economic obscurity and still support our world dominance.
The former would be a great argument if we had gold and silver as money. Then it would only affect the dumb-assed borrower.
I am a libertarian, so I agree that the gov’t should stay out of the lives of its citizens, but I can see the original poster’s point. Think of it this way - Why are drugs illegal? Surely there is a subset of the population that could use drugs legally and not get addicted or have it impact their personal or professional lives, right? Or why are there speeding limits? I mean, surely there are people who could drive safely with their experience and automobiles at 100+ mph, no?
the scary part of these option arms is that most of the borrowers have no idea of the implications of negative amortization. without appreciation these loans are not candidates for refinance, as they are accruing somewhere in the area of 5-8% of the principal balance annually. further insult to injury is that most were put into these programs with substantial fees being paid to the broker in exchange for a much higher margin (larger neg am) and a substantial prepayment penalty.
That is the key 5-8% added each year. That worked in an up market. What happens if we have a “soft landing” and 0% appreciation for a couple of years? After a couple of years you have compounded 10-20% of additional principal on a loan with an ever increasing rate of interest. No way to refinance or sell an UNDER WATER home! I think 20-25% of loan in CA in 2003-2006 were of this type!
crispy, according to Leslie Appleton-Young we are no longer using the term “soft-landing”…lol
What’s even sadder is that people have taken all these funny-money loans when interest rates were at generational lows..
LOL.
“the scary part of these option arms is that most of the borrowers have no idea of the implications of negative amortization.”
I think the scary part is lenders who peddle option arms to borrowers who have no idea of the implications of negative amortization, not to mention that said borrowers could not even define the meaning of amortization, negative or otherwise…
What I don’t understand is why even the stupid don’t have their “bullshit detector” go off when that flyer for a 1% loan is slipped under their door. I mean sure, the flyer doesn’t have enough information on it to see what the catch is,(that the difference between 1% and fully amortizing current rate is added to the principal) but you’ve got to know that there is a catch.
After you are foreclosed, since your loan had a prepay on it, in addition to getting a 1099 you get a bill from your lender for the prepay.
hehehehehehehehehe
It is amazing to me on how many people are shocked that they have a pre-payment penalty when they are refinancing to another borrower. These things can be up to six months interest. Please do not ask me how I know.
Yeah me too. Didn’t see the prepayment penalty on our loan until wee got the statement at the end of escrow with $25,000 less than we were counting on. Good thing the house in Fontana (Fontucky) went from $230,000 to $420,000 from 2003 to late 2005.
BTW the broker was dating a friend of the family and they never stop talking about how much money he makes and how smart he is. Wonder how much of a kick-back he got from screwing a couple of first time buyers that happened to be friends of the family?
Look, we can all accelerate the coming real estate crash, and we all know the sooner the better because it’s already gotten so out of hand already, and here’s how:
Despite our amazement about it, there are still prospective homebuyers out there still looking to buy a home, who are unaware that they are being led to financial slaughter, and it’s these people who are postponing the inevitable, so here’s what we do:
Post links to this housing bubble site and a dozen others “ONLY” where prospective homebuyers are looking because that’s the only way they’ll find out. Post all over Craigslist and every other real estate listing site you can get into and use tinyurl.com links so they won’t know where they are being referred to. Explanations to those links should be preceded by caveat emptor warnings like “Don’t buy any real estate until you’ve read what’s happening to the real estate market” or “Here’s why you’ll be able to buy real estate for 25% to 60% less in the next 12-36 months”.
The few idiot buyers still out there (I know they deserve it, but let’s get this over with already) will disappear and then we’ll have a pricing freefall, initiated by lender REOs.
I’ve been told lately by many people how surprised they are at how many REOs they are seeing or how many neighbors they now know are in trouble for having bought in the last 3 years and who HELOC’d on top of an exotic or no down payment loan.
People, this giant boulder of a coming crash is just teetering on the edge of a cliff. If we all join together and give it a big push, we can make it happen sooner and get our economy back on track - What do you say? Heave Hoooooo!
Man, you are so right about how many people out there that still think it is a good time to buy a home and that prices will still keep going up, I meet them every day. If you are in the LA area, listen to 97.1 FM on saturdays, there are several RE cheerleader shows, hosted of course by realtors and mortgage brokers, people call in saying that they are looking to invest in RE still. It is amazing how many people are not aware of whats going on in the world around them.
This is why I laugh when I read these articles that Ben posts where these desperate RE people are rationalizing this “beginning of the downturn” by saying that it is bad now but it will probably improve soon. They have not seen any thing yet, it has not even begun yet! It will really start hitting the fan in 2007 but in 2008 I think we will see the real BUST! Bet on it!
Home prices in LA are still high despite the fact that there is a lot of inventory up. A house in my area just sold for $700K. I think the bubble poppage still hasnt reached LA, Chicago, NYC, SF, Seattle. Then again some people never learn. I just met someone who was about to buy a $1.5 million condo in Miami *sigh*.
As Canada’s former Prime Minister Pierre Trudeau said, “Perhaps the universe is unfolding as it should”.
He also said this about the US: “Living next to you is in some ways like sleeping with an elephant. No matter how friendly and even-tempered is the beast, if I can call it that, one is affected by every twitch and grunt.”
That’s one reason this blog has been attracting Canadians recently.
How true is that…since Canada is the US’s biggest trading partner repercussions are always felt. How are Canadians faring with all of GM’s woes as of late? Any plant closures up there?
plant closures in Ontario, and it’s hurting…
It’s not hurting Alberta. We have OIL! It’s different here!
=)
Yeah, i said it…
JCanada — I think that your reasoning also applies to the boonies/non-bubble areas in the U.S. As the bust makes housing in more desirable areas cheaper and cheaper to buy, the differential between prices there and in the boonies decreases markedly. I think that the incentive to live in the sticks has to be affected (except, of course, where job transfers leave no option).
I think I’ve heard of this “Canada” place before? Refresh my memory, where exactly is it again?
Next to Mexico.
one is affected by every twitch and grunt.
Except Vancouver. It has the Olympics.
OT: Actually, Trudeau was quoting Desiderata:
“You are a child of the universe, no less than the trees and the stars: you have a right to be here. And whether or not it is clear to you, no doubt the universe is unfolding as it should.”
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Bernanke told the Senate Banking Committee in his semi-annual testimony on U.S. monetary policy a couple of weeks ago that about 10 percent of all mortgages will reprice in 2006 and another 10 percent of all mortgages will reprice in 2007.
So you have 20% of *ALL* current active mortgages repricing in the next 1.5 years.
Why do I have a sneaking suspicion that BB plans to intersect falling interest rates with this incoming wave of resets?
-
i’m not sure he can. even if he could, i don’t think he would. even if he would, not sure he can do it in time to save these people. it doesn’t take a whole lot of missed mortgage payments to cause foreclosure.
OK boyz and girlz, how shall we define a housing bubble?
How’s about: when interest rates are at “historic lows” (as the radio ads say), people, I should say retards, choose to purchase their home (which is at an epic high price) with an adjustable-rate-mortgage, many of which have “teaser” rates for the first year or two. Like in “the OC”. People are so smart that they virtually guarantee their interest rates (and house payments) will rise far above prevailing values. This is what 70-80% of buyers over the last three years have done. (in the OC and other bubble markets)
Why not “lock in” their rates at historic lows for 30 years? Please choose one:
1) Cuz they can’t afford the 30-year “historically low” rate.
2) Cuz they intend to sell within a few years to realize a large appreciation profit.
3) Cuz they are retards.
4) All of the above.
Of course, an even better option is to not even pay all the interest! That’s become 30-35% of even the ARM loans. Then, houses become even more “affordable”. A 1% “Freedom Loan”. Yay! They’re giving away money! Everybody grab some quick! Woohoo!
Too funny. Now you have all these lenders touting they can get you into a 30 yr fixed loan to save you from your adjustable…when they were saying just the opposite a year ago…lol…too bad none of these borrowers can afford a traditional loan..
I like the definition of a bubble as follows:
When the sale of an asset today is more valuable than the ongoing discounted cashflows from the same asset.
I got a low fixed rate when they were low. I couldn’t believe anyone would get an ARM then.
Being that the average person moves every 7 years, what percentage of the population then has bought a house in the past 3 years. How many homes are listed on the MLS every year and can we assume that the past couple of years every one of them sold. What is it, 6 million per year, so that would mean that over 3 years alone 18 million homes were transacted under some form of bubble, and considering that there’s only about 100 million households in the us, we’re looking at almost 20% of households have bought in a bubble. What percetage of them were bought with some form of liar or suicide loan. Those are some pretty significant numbers of epic proportions.
Here’s a question I’ve been meaning to ask, who’s the worst FB, who is in the worst shape: FB#1 who took out an interest only ARM with 103% financing, or the FB#2 who took out a 30-year fixed, for a similar (say $800,000 place in the bay area) with 20% down?
I’m taking non-recourse loans here, and forget about HELOCs. Both FBs can just drop the keys off at the bank when s/he can no longer make the payments. Okay, they are screwed when it comes to taxes, and their FICO score is in the toilet, buy otherwise they owe nothing to the bank.
FB#1 with the interest only ARM walks away not having lost any down payment, and having lived in a nice place with a fairly low payment, probably on the order of what could be attained by renting the place, with a tax deduction to boot.
FB#2 loses all or part of the down payment as real estate prices fall, plus was throwing money away more money in equity, plus presumably has a job that can manage these 30-year fixed payments in an ongoing way, so even if s/he doesn’t go bankrupt is stuck forever having paid top dollar, and now struggling to pay the mortgage, on a mediocre house.
Personally, I came *this* close [holding fingers together real close] to being FB#2, but looking back, knowing what I know now, it’s seems like FB#1 is in a much better position, and with non-recouse loan’s, may not be so “F’d” at all, except around tax time.
“FB#1 with the interest only ARM walks away not having lost any down payment, and having lived in a nice place with a fairly low payment, probably on the order of what could be attained by renting the place, with a tax deduction to boot.”
I could be wrong (probably am) but I thought the 2nd loans that round out the 80% to 100% are recourse loans, meaning they can come after you for your assets (except for IRAs). So even if you walk away, the lawyers may dog you for the unpaid principle and fees. Now with bankrupcy #7 harder to accomplish, this may result in eventual garnished wages and monthly payments to an old debt for a long time.
One reason I think this way is the absence of PMI. The loans are structured like this partially to get around PMI payments.
Is this thinking not correct?
all purchase money loans are non-recourse in california,unless fraud was involved.can you say “stated income”
Stated income loans allows aggressive lenders to have it both ways against lying buyers: if the market goes up, the buyer can pay off from the equity. If the market goes down, the buyer will still have to pay. The buyer can’t can’t claim “no recourse” for the deficiency, or discharge the debt in bankruptcy, because of the fraud.
FB#1, but only in this worst case scenario of turning over the keys.
Theres’ a very good chance that FB#2 can weather the storm. They must have some smarts to get into a fixed loan with a down payment. There is a smaller chance of going really under water, and, if they have a job and can continue the payments, they can budget and come out the other end of the tunnel with their FICO and their home.
FB#1 is always in a precarious situation.
Sure… but what is to stop FB#1, a pizza delivery boy by trade, just tossing the keys to the loan officer at the bank and moving back in with mom?
Admittedly, if an 800k house drops to 700k or 600k or worse, that debt forgiveness is going to hurt when it comes to paying taxes. But what if it stays 800k buouyed by endless foreign investment keeping credit cheap and plentiful, then he hardly loses anything except his credit rating.
In any case, responsible FB#2 is stuck paying twice as much for the same place as they would have just to rent it, easily losing any equity with any downturn in prices, with no way out for the foreseeable future.
Though there is no situation where I would go the FB#1 route, I can’t help but wondering if there are a number of people who are going to get away with it.
FB#2s probably also have a far better credit rating that would be trashed if they walked than FB#1s.
I’m no expert, but with the new bankruptcy laws in effect, I don’t think it’s that easy to walk away with just a bad credit score now. I think these FB’s are truly f*cked (please correct me if I’m wrong.)
Also, the person with 20% down is less likely to walk away as a “real” FB would. Too much invested in the property so they will most likely ride out the cycle and stay put. That’s why the traditional 30 yr fixed loans were the norm for so long…it gave you a cushion against any downturn in the market so you would be less likely to bail out.
As long as they have a job which pays above the poverty level for that jurisdiction, which they would need to have to qualify for loans of this size anyway, they are not elegible for Ch. 7 anymore. They could try to file a Ch. 13 and cram down the second trust to the level of the value of the home (turn secured debt into unsecured, then treat it like other unsecured and pay it at pennies on the dollar). To do that, however, they must have regular income which is sufficient to pay the first. If they go from a $1,250.00 teaser to a $6,000+ monthly mortgage on the first, and they don’t have the income to cover that plus all of their other monthly payments, and they don’t have equity in the property, they are truly F’d because they cannot propose a feasible Ch. 13 Plan. It’s abandon ship, put your rental deposit down now and have the management company run the credit check now before the bank reports you so you have a (much smaller apartment) roof over your head time. Then wait for seven years or so for the foreclosure to drop off your credit.
Don’t foreclosures stay on your credit report for 10 years?
Good question.
However, here’s another good question for you: Who cares?
“they are truly F’d because they cannot propose a feasible Ch. 13 Plan.”
California loans are “non-recourse,” meaning if you turn over your keys to the bank the day that ARM adjusts, that’s it, you are off the hook, the bank has your house and they can’t take any more money from you. So bankruptsy rules do not apply. Erase all bankruptsy considerations from your thinking (for California and many other states).
If the bank sells your $800k loan for, say, $700k, then the IRS sees that $100k difference as income, so you have to pay income taxes on that money. But you won’t owe that $100k to the bank.
*first line last paragraph: for “loan” I mean “house.”
The cutoff for chapter 7 vs 11 is that you have to make more then the median income in your state. If you don’t qualify for chapter 7 you are really going to get screwed as the new rules only allow the bare minimum for living expenses, in fact if you live in a high cost area you may not even be able to afford a place to live at all. Maybe there will be a second round of equity locust invasions as the FBs look for a real cheap place to live. They only look at the last two years income so if you are only slightly above the mean you might want to get a job flipping burgers now.
Bankruptcy FAQ>/A>
“As long as they have a job which pays above the poverty level for that jurisdiction, which they would need to have to qualify for loans of this size anyway, they are not elegible for Ch. 7 anymore.”
Isn’t the cutoff the median income for the jurisdiction, rather than the poverty line?
I think it will be so widespread, walking away from loans, that it won’t be a big deal (stigma),” everybody’s doing it”. That is what happened in the early 90’s. FB #2 will do the “right thing” and end up getting screwed. All the #1’s will laugh and buy again down the road.
Yep, my thoughts exactly.
And since these people won’t qualify for mortgages when the banks tighten up their standards, damand for the purchase of homes will be even lower.
‘We’ve never had such a high percentage of loans come due at the same time, so no one really knows what will happen,’
Hmmmm. I do.
One had this to say, “Don’t mistake a plain vanilla adjustable rate mortgate with the exotic ones, such as the option-ARM, interest only, and teaser rate loans. A regular ARM makes a lot of sense when interest rates are high.”
This is probablly true, only one problem,…RATES HAVE BEEN HISTORICALLY LOW!!!!! YA NIMROD!!!!!!……
So even those who took out the regular “ok ARM’s “(his definition) are screwed because they only work when rates are goin down.
These clowns must not ever listen to themselves.
OCBear
I wrote that and I took it for granted that readers of this blog understand that it is implicit that even with recent Fed tightening rates are still below the historical norm.
That said, the personal attack was highly unwarranted, given that my statement was “A regular ARM makes a lot of sense when interest rates are high.” That is a true statement. However, interest rates are not high right now.
Moreover, I was responding to a post that said adustable rate mortgages are only a good idea when you can pay off the balance in full. Simple financial analysis reveals that this is not true in a high interest rate or declining interest rate enviroment. The fact that we are not in this scenario now in now undermines the accuracy of my analysis.
I was thinking the same thing: for many ARMs turned out not to be a bad thing back in the 80’s.
“Call it the worst worst-case scenario. The interest rate on your adjustable-rate mortgage jumps just as the housing market enters a prolonged slump.”
This is far from a worst-case scenario: this is exactly what’s happening!
Add:
- Lose you job in the teeth of a recession
- Option arm resets
- HELOC’ed right up to the max
- Having a brain the size of a walnut
The real worst-case scenario has a high probability of coming true for many FB’s
I heard that it was Adjustable Rate Mortgages that killed the dinosaurs.
Yes, even the powerful Suzannosaurus Rex was no match for them.
LOL.
“I heard that it was Adjustable Rate Mortgages that killed the dinosaurs.”
This is a common misconception. However, recent evidence shows that it was actually a phenomenon called Neg-Am I.O. (maybe the name of a comet?) that did them in.
Are you sure you researched this?
2 Friends of mine in the Mortgage industry were telling me last night how slow it was. It was dead! They then said that it should get better because the U.S. gov’t is going to start lowering rates soon.
How stupid can these people be???
Most are very stupid. Granted, there are some very good people in the industry (I’m covering my ass in case people rip on me) but most of them are newbies just looking to make a quick buck.
Perfect example…a guy that used to be a bartender at one of our local watering holes decided to start selling mortgages a couple of years back. This guy couldn’t even remember my freakin’ drink order half the time (maybe he just didn’t like me, guess I can’t blame him)
I was talking to a state trooper in the courthouse last fall. He was getting out of the service after 20 years and planned on becoming a real estate broker. I expressed my doubts about the wisdom of that move and he looked at me like I was a hydrocephalic. I wonder what he’s doing right now…
I wonder what you were doing in the courthouse last fall…
The same thing I did last week and I’ll do again next week!
Are you Dawg the bounty hunter????????
Most Americans can’t find the Middle East on a map.
Thought I’d “run some numbers” to see what the “pain” would
be for various loan amounts…people who are in the 500K range are gonna be in a world of hurt as their loans adjust upwards.
Loan Months Rate P&I Increase
100K 360 2 $370
100K 360 4 $477 $107
100K 360 6 $600 $230
300K 360 2 $1,109
300K 360 4 $1,432 $323
300K 360 6 $1,799 $690
500K 360 2 $1,848
500K 360 4 $2,387 $539
500K 360 6 $2,998 $1,150
700K 360 2 $2,587
700K 360 4 $3,342 $755
700K 360 6 $4,197 $1,610
Not completely accurate because when the loans adjust the new payment amount will be calculated against the remaining balance for the full term minus the months you have already been paying. But the way that interest is paid back the first few years the principal is for all practical purposes…negligible.
As far as negative adjustables…..the numbers above would be worse.
The high flying housing plane ride is over when the RE Agents, banks and associate Gang Members that piloted this disaster looking for a place to happen, are seen casually buckling on parachutes and sneaking towards the door.
Here are the monthly increases for various price points as interest rates increase
Loan/Rate/Increase
100K/2%
100K/4%/$107
100K/6%/$230
300K/2%
300K/4%/$323
300K/6%/$690
500K/2%
500K/4%/$539
500K/6%/$1,150
700K/2%
700K/4%/$755
700K/6%/$1,610
Assumptions:
Term: 360 months
Increase: P&I only
Error: ~10% (due to not taking into account various factors like decreasing term and loan balance
All I can say is….OUCH
On the new bankruptcy law:
If someone cannot pay their bills, they will do just that, “not pay their bills”. Bankruptcy or not, if you loose your home there is no longer an asset to attach a lien onto. There will be a lot of people in the near future who will just say #%ck it and walkway from mortgages, credit cards, etc. As for their FICO score, they will not care, since the important things in life are food, shelter (apartment), and family. Oh, and looking at the world today, everyone with a job (for the most part) has a place to live regardless of their credit history. So the argument that a bad FICO score will leave you on the street is frivolous. I personally know a lot of people that have horrible credit, and they always found an apt to rent. In fact, I believe it is harder to obtain a cell phone with bad credit (except for prepaid) than an apt.
So yes, a lot of people will just walkway causing a huge number of homes to come onto the market, lowering prices even more. 1099 or not, people have to survive, and if they don’t have money to pay, there is very little that anyone can do. Okay, I know I just opened myself up to the IRS/wage garnish situation, but that could be the silver lining that allows someone to qualify for bankruptcy.
“There will be a lot of people in the near future who will just say #%ck it and walkway from mortgages, credit cards, etc. ”
Generally I agree, but mortgages and credit cards can not be lumped together, as it appears you have done. Mortgage loans, in some if not most states (i.e. California), are “non-recourse.” The bank can take only your house from you, but no money other than that (the IRS can, though, which I explained elsewhere on this thread). So if you can’t make your payment after it has adjusted, then move out, turn your keys into the bank and you are done (somewhat) with the whole messy affair.
Credit card loans, HELOCs, and refinancings of mortgages, are all “recourse loans,” meaning your lender can track you down to the ends of the earth and all bankruptsy issues apply.
Think any of these geniuses thought they could ever lose on these properties?
http://westpalmbeach.craigslist.org/rfs/186924737.html
Click on the link, then click on the MyFloridaDeals link. In the upper right, you can click on “Submit” but the titles “About Us”, “Contact” and the other one are dummies — nothing to click.
Trent Smith looks like he is high.
The post was removed by Craiglist, hmmm…
Others have said it but getting a 30 year fixed when rates were under 6 percent was a once in a generation opportunity, it almost justified overpaying a little for the house. It will come back to haunt this country that so much of the populace is unwilling or unable to think things through and make intelligent, rational, reality based decisions, both with money and other things.
Emphasis on “almost”. Anyone making payments on an underwater asset is getting screwed, no matter how low the interest rate is.
That’s basicly the reasoning that I’ve been using for not selling my home that I bought in ‘99. I currently have a 4.875 15 yr fixed and I don’t think I’ll see a mortgage like that again in my lifetime.
Soft landing! Oh, so soft. Like a pillow, or a fluffy bunny. Real Estate is always your best investment, no matter what the price. And it always lands snuggles soft.
Yeah, the real estate airplane is currently starting into a nosedive and the engines have cut out, but I’m sure the pilot will figure out how to make a “soft landing.”
My hubby was talking to some mortgage loan guys he knows (apparently these guys have a lot of spare time now because there isn’t any business) who were getting freaked out by the number of FB’s storming into their office blaming them for their bad loans. At this point, they cannot refinance to a 30 yr fixed because they can’t afford it.
The solution: 40 or 50yr fixed loans.
Which, even according to these guys is no solution at all because payment is almost as much and they will never own their house in their lifetime. But we are talking about the same people who took these interest only loans.
As for the loan guys. These guys are nervous. They don’t know who is coming through the door next. I said to hubby, “What comes around, goes around.” But he said that they swear they warned these people what they could afford in a loan when they prequalified them, but the people would come back with a house twice the price and tell them, “I don’t care how you do it, just get me into this house.” Now the FB’s are up against a wall and blaming the loan guys.
What a mess.
Regarding “mailing back the keys” on a non-recourse loan in California: In Section VIII c of the standard loan application, Declarations, there is a question about “deed in lieu of Forclosure.” The lender will report this and the person’s credit report will be severly affected. Also, the IRS will tax you on debt forgiven.
Regarding renting after, when I was a landlord, I did a credit check on every applicant (recommended by the Associations of Apartment owners) and declined some for bad credit. I remember one person was extremely surprised that I would not approve them….never happened to them before.